IPhone May Cost Verizon $5 Billion in First Year

Apple's iPhone 4 is displayed for a photograph in Aspen, Colorado. Photographer: George Frey/Bloomberg

Jan. 11 (Bloomberg) -- Verizon Wireless, set to get Apple
Inc.’s iPhone this month after four years of waiting, may spend
$3 billion to $5 billion to subsidize customer purchases of the
device this year, cutting into profits, analysts say.

Verizon, the largest U.S. wireless carrier, will announce
that it’s getting the device at an event in New York today and
plans to put it on sale later in the month, a person familiar
with the company’s plans said this week. The person could not be
identified because the plans aren’t yet public.

While the smartphone will help Verizon add more subscribers
this year than rival AT&T Inc., currently the exclusive U.S.
carrier for the iPhone, it will also crimp profits, said John
Hodulik, an analyst at UBS AG. Hodulik said Verizon may sell 13
million of the devices with an estimated $400 subsidy this year,
which would add up to a total of $5.2 billion.

“You basically write customers a $400 check,” said New
York-based Hodulik, who rates parent Verizon Communications
Inc.’s shares “neutral” and doesn’t own them. “We expect
margins to be down pretty meaningfully in the first quarter and
second quarter.”

James Ratcliffe, an analyst at Barclays Plc in New York,
estimates Basking Ridge, New Jersey-based Verizon will sell at
least 9 million iPhones this year with a subsidy of about $350.
That would add up to $3.2 billion this year.

Marquett Smith, a Verizon Wireless spokesman, declined to
comment on any potential subsidies.

Data Plans

Wireless operators pay companies such as Apple one price
for a phone and then sell them to consumers for less to
encourage people to sign up for two-year service contracts. The
iPhone subsidy, at $400, is higher than the $200 to $300 that
carriers pay for most smartphones, said Tina Teng, senior
analyst for wireless communications at researcher iSuppli Corp.

The iPhone 4 with 16 gigabytes of storage costs $199 with a
two-year contract at AT&T. The company bears most of the cost of
the device and makes its money back from customers who pay for
wireless data plans to access the Web and download games and
applications.

Revenue from data plans is one of the last areas of growth
for wireless companies, which are coping with declining monthly
bills for voice revenue and an increasingly saturated U.S.
wireless market. There are enough mobile devices in circulation
to cover 93 percent of the population, according to the CTIA
wireless industry association.

Bills for data plans rose 20 percent for contract customers
at AT&T in the third quarter and 19 percent at Verizon while
monthly revenue per user rose about 2 percent at both companies.

Earnings Drop

Verizon Communications, which co-owns the wireless business
with Vodafone Group Plc, fell 56 cents to $35.36 in New York
Stock Exchange composite trading at 4 p.m. The shares have
declined 1.2 percent this year. AT&T fell 43 cents to $27.91,
while Cupertino, California-based Apple fell 82 cents to $341.64
in Nasdaq Stock Market trading.

Earnings per share at Verizon Communications will drop to
$2.20 in 2011 from an estimated $2.26 last year, Hodulik said in
a note to investors. Meanwhile AT&T, which will add fewer new
subscribers next year, will see earnings per share grow to $2.55
from Hodulik’s estimate of $2.28 for last year. Verizon and AT&T
will report fourth-quarter earnings later this month.

The lower profit will help Verizon add 2.1 million net new
subscribers in 2011, he said. That compares to an estimated
650,000 at AT&T and would mark the first time that Verizon’s
subscriber growth will outpace its largest rival since 2008.

Subsidy Trends

AT&T will sell about six million iPhones this year, down
from an estimated 15 million last year, said Ratcliffe. The
company’s subsidy will also drop to $350 per phone from $400
because of the end of its exclusive deal. As a result, AT&T’s
total subsidy for the Apple device will drop to about $2.1
billion this year, from $6 billion, he estimates.

It takes AT&T about six months to make back the cost of the
iPhone from customers’ data plans, iSuppli’s Teng said. She
expects Verizon to have to pay the same price for the flagship
Apple phone, which commands a quarter of the market for U.S.
smartphone owners over the age of 13, according to data from
ComScore Inc.

The average subsidy is likely to fall as more advanced
smartphones hit the market, Teng said in an interview.
Smartphone makers will likely cut prices for their devices,
encouraging carriers to do the same.